Did a guaranteed residual-value rider make the described equipment lease a financing lease under Rule 3.294?

Plain-English summary

The lease let the lessee buy the equipment for a guaranteed residual value at the end of the term, or allowed a sale to a third party. If the third-party price fell below the guarantee, the lessee had to pay the shortfall.

Rule 3.294 listed several ways a lease could qualify as a financing lease, including mandatory title transfer, a nominal purchase option, specified lease-term and return conditions, or a residual value below the rule's threshold without a return provision. Based on the agreement described, the Comptroller found none of those tests satisfied and classified it as an operating lease.

Common questions

Did the residual-value guarantee automatically create a financing lease? No.

How was the agreement classified? As an operating lease.

What facts mattered? The title-transfer, purchase-option, lease-term, return, and residual-value terms listed in Rule 3.294.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8903L0928G09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller December 15, 1988

Dear ***:

Mr. Cherry asked me to answer your letter concerning a lease
agreement with a guaranteed residual value rider.

A financing lease as defined in Rule 3.294, is a contract under
which:

• title to the property must be transferred to the lessee at
  the end of the lease,
• the lessee has a nominal purchase option which at the
  beginning of the lease is estimated to be substantially less
  than fair market value of the property when the option is
  exercised,
• under certain conditions, the lease term is equal to 75% or
  more than the estimated economic life of the property with no
  provision for the return of the property to the lessor, or
• the residual value of the property is less than 10% of the
  property's fair market value at the inception of the lease
  with no provision for the return of the property to the
  lessor.

In your letter you state that the guaranteed residual value is
never less than 10% of the original purchase price of the
equipment. At the end of the lease term, the lessee may purchase
the equipment for the guaranteed residual value, or the equipment
may be sold to a third party. If the equipment is sold for less
than the guaranteed residual value, the lessee must pay the
difference between the actual sales price and the pre-set
guaranteed residual value.

Based on your information, the lease, including the rider, does
not fit the definition of a financing lease as set out in Rule
3.294. It is an operating lease.

This opinion is based on the facts presented. If there are addi-
tional or different facts, the opinion may change.

If you have any questions or need more information, please call
our toll-free number 1-800-531-5441. The regular number is
512/463-4614. You may write me at the Taxability Section, Legal
Services Division.

Sincerely,
Adina Whittemore
Taxability Section
Legal Services Division